EPF tax: Government in damage control mode

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People unnecessarily misuse the EPF route for tax avoidance, says Revenue Secretary Adhia.

Tax benefits on the Employees’ Provident Fund (EPF) are not meant for those who earn Rs. 2 crore a month, Revenue Secretary Hasmukh Adhia told, mounting a strong defense of the Budget proposal to tax 60 per cent of EPF savings at the time of withdrawal on retirement. The Finance Minister will now take a fresh call on the issue, the government said in a statement on Tuesday.

Faced with a strong and immediate backlash from the salaried class, political parties and trade unions, the Prime Minister’s Office stepped in to take stock of the issue as well as the intent behind the proposal early in the day, holding a fairly long parley with Finance Minister Arun Jaitley and top finance ministry officials.

By noon on Tuesday, the revenue secretary had clarified in an interview to All India Radio that the tax would only be applicable on interest income paid on EPF savings and if an employee chose to buy an annuity with 60 per cent of his EPF account balance at retirement, it would be tax-free.

This position, however, changed further three hours later, with the finance ministry issuing a clarification stating that the idea to tax interest income was only based on some representations received today by the government and will be considered by the FM before passage of the Finance Bill, along with other suggestions on the proposal.

“We have also received representations asking for not having any monetary limit on the employer contribution under EPF, because such a limit is not there in NPS (National Pension Scheme). The Finance Minister would be considering all these suggestions and taking a view on it in due course,” the ministry said in a statement issued Tuesday afternoon.

Mr. Adhia, who met  shortly afterward, defended both the tax proposal on EPF savings and the related announcement to cap tax-free employer contributions into EPF at Rs. 1.5 lakh a year. Similar employer contributions into the NPS are allowed up to 10 per cent of salary without any limit.

“The rationale is that Rs.1.5 lakh is a big sum. If Rs.1.5 lakh is 12 per cent (of salary), how much is 100 per cent… about Rs.15 lakh income. Do we need to encourage, say, Mukesh Ambani who gets Rs. 2 crore salary per month to also get a tax exemption benefit?” Adhia said, adding that even bank deposits should be tax-free in that case.

“People unnecessarily misuse the EPF route for tax avoidance,” Adhia said, highlighting that out of the 3.70 crore active EPF accounts, around 3 crore belong to those who earn less than Rs.15,000 a month, the statutory limit for compulsory EPF contributions at the rate of 24 per cent of salary.

“When NPS (created in 2004) was not there, EPF was given the exempt-exempt-exempt (EEE) tax status mainly for the 3 crore people, not the 70 lakh high-income people who were allowed to join EPF on a voluntary basis,” the revenue secretary said, pointing out that even people contributing Rs. 12 lakh a month into their EPF accounts ‘got complete tax exemption.’

An investment instrument with EEE status means that all contributions, the return on them and the withdrawal of the accumulated corpus are tax-free. The NPS so far has an EET regime that taxes only withdrawals on retirement.

While Mr. Jaitley, in his Budget speech, had introduced the EPF tax provision as a sop for the NPS, to create a level playing field between them, there was no mention of the condition that those who invest 60 per cent of their EPF corpus in annuities will be exempted from the tax.

The revenue secretary also said comparisons with government employees, whose retirement savings are parked in the general provident fund (GPF) and would remain tax-free, weren’t fair.

“In the case of GPF, only the employee is contributing, there is no employer contribution. That’s why private employees get 24 per cent of salaries as tax-free contributions to EPF, while in the case of GPF it is only 8.33 per cent that we have to contribute,” Mr. Adhia said. He said the move was meant to encourage old age pensions that are not an obvious choice with senior citizens because of the belief that their children would look after them in their later years.

“The government is only indirectly encouraging people to go for annuity and get a monthly pension. Who will take care of their pension requirement if there is a contingency? ” he asked.

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